The Pay As You Earn repayment plan is the federal student loan repayment plan that has the lowest required monthly payments for most borrowers. It also is the plan that has the best student loan forgiveness program.
The part of PAYE that will disqualify many borrowers is the current requirement that all of your loans must have originated after October 1, 2007. If your loans are older, the best you can qualify for is Income Based Repayment (IBR has similar terms, but not quite as good as PAYE).
If your loans are too old to qualify for PAYE, be sure to check out our article on signing up for IBR. If your loans are no too old, just follow these six easy steps:
Step #1: Make sure you know who services your federal loan – ALL OF THEM.
Go to the National Student Loan Data System to find a list of all of your federal loans. This page will show all of the companies servicing your loans, and how much you owe. You will need all of this information in order to determine your monthly income based payment to each company (Don’t worry, you won’t be doing any complicated math on this one).
Step #2: Consider Student Loan Consolidation first.
If you are going to consolidate your student loans, you can enroll in PAYE at the same time, so there really is no point in signing up until your consolidation is processed.
We have previously discussed consolidation in more detail, and it is important to fully understand the pros and cons of consolidation before you make this decision. If you decide to consolidate, just go to the federal student loan consolidation website, and you can also enroll in PAYE when you file that paperwork.
Step #3: Contact your servicer(s) and get your paperwork in order.
This is one step that will vary depending upon who your lender is. Some lenders make the process very easy and allow you to sign up on an electronic form. Others require physical documents and snail mail. If you are handwriting your form, make sure your writing is neat an legible as they process many of these each day and an error can really set you back.
If you have multiple lenders be sure they are aware of your other federal loans. This will limit how much they can require you to pay each month.
Step #4: Submit proof of income.
As part of the form submission, you will be asked to document your income. Here again, some lenders have an e-form where you can authorize the IRS to share your tax records form the previous year and you are done. Others will require you to mail or fax your completed tax return. If your tax return does not adequately represent your income, you can submit two recent pay stubs or proof of unemployment.
Step #5: Wait patiently, but keep on your lenders.
Processing IBR/PAYE applications can take over 3 months. As the program gets more popular, you can expect it to take even more time. As a result it is important to be patient.
However, the process is not without flaws, and as a result it is critical you continue to check in to verify that your lender(s) has the proper documents and that things are going according to schedule.
Step #6: Be sure to re-apply each year.
The PAYE payments only last for one year. Each year you must again document your income and re-apply for PAYE. The re-application is fairly easy, but you don’t want to wait until the last second. As this can also take months to review, plan on applying approximately 3 months before your PAYE plan is set to expire. You don’t want your payments to go up and not be able to afford them.